The present-day site of Idaho Falls became a permanent settlement when freighter Matt Taylor built a timber-frame toll bridge across the Snake River. The settlement was initially called Taylor's Crossing, but postmarks indicate that by 1866, the emerging town had become known as Eagle Rock. The name was derived from an isolated basalt island in the river near the ferry, where approximately twenty eagles nested. In 1891, marketers convinced town leaders to change the name to Idaho Falls in reference to the rapids below the bridge.

In 1887, following the construction of the Oregon Short Line and a railroad workers' strike in Idaho Falls (then Eagle Rock), most of the railroad facilities were moved to Pocatello, where the new line branched off the U&NR. This caused a sharp drop in population and nearly killed the town.

The area was originally the territory of the Shoshone-Bannock and Northern Paiute Indians.

Drought struck the still-struggling town in 1894-95. The settlers held meetings and drew up plans aimed at controlling the river to secure desperately needed water. On June 22, 1895, the world's then-largest irrigation canal, the Great Feeder (located 5 miles northeast of Ririe), began diverting water from the Snake River, helping to convert tens of thousands of acres of desert into green farmland. With this newly acquired water, the area was able to grow sugar beets, potatoes, peas, grains, and alfalfa, and became one of the most productive agricultural regions of the United States.

On January 3, 1961, the National Reactor Testing Station (NRTS) in the desert west of Idaho Falls became the scene of the only fatal nuclear reactor incident in U.S. history. Three workers were killed by the explosion and buried in lead coffins. The site has since developed into the Idaho National Laboratory (INL), known locally as "The Site", and its contractors are a major economic engine for the Idaho Falls area, employing more than 8,000 people.

The Idaho Falls Chukars, an independent baseball team of the Pioneer League (not affiliated with Major League Baseball), are the only professional sports team in Eastern Idaho. A chukar is a game bird found in the region.

According to the United States Census Bureau, the city has a total area of 22.80 square miles, of which 22.35 square miles or 98% is land and 0.45 square miles or 2% is water.

After the citizens of Idaho Falls voted to change the city's name in 1891, residents began talking about building a theater that could host vaudeville acts, road shows, and musical performances. In 1919, three local men put up $175,000 to build the Colonial Theater, which was billed as the largest theater in the Intermountain West, with an orchestra pit, eight dressing rooms, and 1,400 leather-upholstered mahogany seats. The theater opened on November 10, 1919, with the contemporary play John Ferguson by Irish playwright St. John Greer Ervine.

Idaho Falls' Ammon Cemetery is rumored to be haunted by a ghostly child who has been spotted climbing a tree near his or her grave. Reports are inconclusive whether the child is a girl or a boy, but the ghost is often seen waving to passersby from the tree.

"I once had a friend named Joe the biggest lumberjack in old Idaho
He worked like a dog from day to day he drew ten cents an hour for his pay
Come Saturday evenin' it have him a ball it'd ride him along the Idaho Falls
But now old Joe he's laid to rest he forgot this slogan that he learned best
Don't you cut timber on a windy day stay out of wood better listen what I say
Winds and top flowers go either way don't you cut timber on a windy day"